2023 global outlook and fortunes of Nigerian investors

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The Business Desk of The Point Newspaper picked the minds of financial experts at both Financial Derivatives Company Limited and Cordros Research Limited to know what the financial year 2023 holds for Nigerians and investors. Here are their views and projections. There are also insights into where investors can invest their money for gains in the financial year. BAMIDELE FAMOOFO reports.

Uba Group

2022 in retrospect

2022 will always be a year to remember for many households, businesses, economic thinkers, and policymakers in Nigeria as the year saw blends of economic challenges, ranging from the COVID-19 fiscal stimulus backlash to shocks arising from Russia’s invasion of Ukraine and the far-reaching effect of the blistering monetary policy tightening regime. No doubt, the latter two events – the global monetary tightening and the ongoing Russia-Ukraine war – halted the momentum of post-pandemic recovery, muting output growth in Nigeria and several other countries.

2023 global outlook

The year 2023 is just here, and signs that this economic, market, and financial related turmoil will end soon are far from reality. The global economy will continue to face these major headwinds, especially from Russia’s invasion of Ukraine, which contributed largely to the energy crisis and global commodity price volatility. The Russian war is likely to continue throughout 2023. The war is impacting Nigeria’s economy, particularly through supply chain disruptions and higher commodity prices.

Giving insights into expectations in the economy in the year, the economic think-tank at Financial Derivatives Company Limited led by Bismarck Rewane who is the Chief Executive Officer, noted that the internal crises facing Nigeria are making the country less resilient to external shocks.

“Beyond the influence of external forces, Nigeria’s domestic economic landscape remains rough. The economic uncertainty created by election expectations, a heavy debt service burden, forex pressures, and inflation are a few of the challenges Nigeria’s economy is facing, which will continue to make the country vulnerable to external shocks,” the FDC think-tank disclosed.

In addition, adverse weather conditions, rising borrowing and logistics costs, and declining demand in major export markets may subdue economic growth in 2023.

According to projections by the Economic Intelligence Unit of the Central Bank of Nigeria, the Nigerian economy is expected to grow at 2.8% in 2023, down by 1.6% from the estimated growth rate of 3.2% in 2022.

“Beyond the influence of external forces, Nigeria’s domestic economic landscape remains rough. The economic uncertainty created by election expectations, a heavy debt service burden, forex pressures, and inflation are a few of the challenges Nigeria’s economy is facing, which will continue to make the country vulnerable to external shocks”

Slowdown in economic activities to stifle GDP growth

According to FDC, the expected slowdown in Nigeria’s GDP growth is attributed to both external and internal economic imbalances. Nigeria is not alone, as other economies are not shielded from the adverse impact of the ongoing wave of global economic shocks.

In the sub-Saharan African economy, South Africa’s economy is projected to slow down to 1.3% in 2023 from about 1.9% in 2022. Similarly, Angola is expected to experience a slight slowdown in 2023, experience slowdown in economic activity in 2023, to grow at 2.6% compared to the estimates of 2.8% in 2022, and Botswana is expected to slow to 2% in 2023 from 6% in 2022. Though countries like Kenya and Niger are expected to record an uptick in GDP growth (projected at 5% in 2023 from 4.9% in 2022 for Kenya and 5.1% in 2023 from 1.4% in 2022 for Niger), most of Nigeria’s sub-Saharan African trading partners like Ghana and Botswana are expected to experience slowdown in economic activity in 2023.

The slowdown of economic activities in China due to its zero-COVID policy is bucking the growth trend around the world. However, if there are no obstacles to its recent commitment to open up its economy, Nigeria will benefit from increased trade activities. China, which accounts for 18% of the global GDP, is one of Nigeria’s most strategic trade partners.

In 2019 (pre-pandemic), China accounted for 6.2% and 20.49% of Nigeria’s export and import respectively.

It is important to note that the anticipated economic slowdown in sub-Saharan African countries, especially Nigeria, are due largely to the global inflation surge caused by the Russian-Ukraine war, which affects global trade, and the COVID- 19 fiscal stimulus backlash.

Borrowing cost to remain high as inflation tapers

However, borrowing costs will stay high, discouraging excess borrowing from consumers for consumption purposes and the dwindling appetite of firms towards collecting loans because of high interest payments. Nevertheless, Nigeria’s inflation is projected to taper by the end of the year due to the lag effect of the central bank’s interest rate hike.

The expected rise in oil prices above the 2023 budget benchmark is expected to bolster external reserves, which may help alleviate the pressure in the forex market currently stocking inflation. However, this does not change the fact that the exchange rate premium may not vanish in 2023. The divergence between the official and parallel rates could persist in the coming year, due to forex supply shortages. To this end, exchange rate policy reform in 2023 is inevitable as it is the panacea to easing the current pressure in the forex market.

“CBN"

Fiscal deficit to grow worse in 2023

Another important trend to watch for in 2023 is fiscal balance. The 2023 budget worth N21.8 trillion has been passed, with the fiscal deficit now amounting to N11.1 trillion and debt service payments estimated at N6.6trillion. Nigeria faces a limited fiscal space in 2022, and it is expected to worsen in the coming year due to high levels of corruption and low oil production. Subsidies are also eroding a substantial part of government revenue, thereby worsening the fiscal crisis in the country.

It is worth mentioning that earnings from crude oil account for half of Nigeria’s retained revenue. The newly passed budget assumes an average crude oil price of $75 per barrel per day, with daily oil production set at 1.69 million barrels. Given the decline in oil production amid oil theft and vandalism, Nigeria may not achieve the targeted earnings from the crude oil sale to fund the 2023 budget. The narrow non-oil revenue base is not helping the situation. Nigeria is challenged by high fiscal pressure. The government’s deficit will grow as spending exceeds expenditure. The fiscal deficit has widened from 4% of GDP to approximately 5.2% of GDP between 2021 and 2022. The fiscal sustainability criteria for most countries are typically 3%.

Nigeria’s fiscal deficit is already above the threshold, suggesting that Nigeria’s fiscal space is overheating.

Though the fiscal deficit is expected to slightly ease in 2023 owing to more efficient utilization of revenue and expected gradual removal of subsidy, Nigeria’s public debt profile is becoming worrisome.

Nigeria’s public debt hit N44.06 trillion in Q3’22, up from N42.84% recorded in Q2’22. The astronomical increase in Nigeria’s debt stock in the past decade is pushing Nigeria to the brinks of sovereign default.

In 2023, Nigeria will have no choice than to approach the IMF and could commence policy support instruments (PSI) programmes that could see her move to restructure its debts. This year, Nigeria’s debt-to-GDP ratio is expected to cross the 40% mark with a debt-service revenue ratio of nearly 100%. This will shrink the fiscal headroom, making it difficult to finance critical developmental projects.

Nonetheless, 2023 is characterized by political uncertainties as the nation goes to the polls in February. A tight and unprecedented three-way race for the presidency is being envisaged by the EIU. However, it is expected that whoever picks the mantle of leadership in 2023 will have no other choice than to undertake critical and far-reaching reforms – fiscal, market and institutional reforms. Indeed, the future is not bleak but challenges abound.

Where to invest in 2023

Though a financial think-tank at Financial Derivatives Company Limited, said Nigeria’s capital market will remain volatile in 2023, they submitted that it will perform better than it did in 2022, owing to increased investor confidence after the general elections.

Cordros Research’s outlook for the equities market for 2023 also suggests that there is hope for investors who would invest in some sectors of the stock market as presented below.

Cordros’ sectorial projections

Financial Services (Banking): For 2023FY, Investments Analysts at Cordros Research Unit believe Nigerian banks will maintain their growth trajectory supported by core income, owing to higher loans and investment securities yields. They however cautioned that banks will be cautious about growing loans domestically in 2023FY as the tight monetary conditions will likely limit risk asset creation. On the external front, Moody’s downgraded nine Nigerian bank’s long-term ratings based on the weakening in the Nigerian government’s fiscal capacity to support the country’s banks, and interlink ages between the sovereign’s weakened creditworthiness and the banks’ balance sheets, given the banks’ significant holdings of sovereign debt securities.

Cordros expects non-core income to support earnings in 2023FY, albeit marginal, as the price sharing and glitch on the e-banking platforms will continue to impact the performance. In addition, we believe this will negatively impact Nigerian banks looking to raise debt externally.

Industrial Goods (Cement): For 2023FY, we envisage solid growth in revenue for firms under our radar on the back of higher prices of cement and leverage of exportation strategy. On the flip side, we highlight that the higher inflationary environment will continue to pressure the operational activities of firms in the industry. Consequently, we believe companies that can maintain operational efficiency and optimise plants to enhance fixed cost absorption will be better placed to deliver decent earnings in 2023.

Agriculture: Despite the challenging operating landscape, factors such as CPO import restrictions amid current FX liquidity challenges and long-term sector growth prospects remain favourable for sector players. Thus, we remain optimistic about OKOMUOIL (BUY, TP: NGN242.81/s) and PRESCO (BUY, TP: NGN213.37/s). For OKOMU OIL, though we do not expect a significant increase in its maturities, we believe the upgrade of the milling capacity at the Okomu II plantation will cause an improvement in its production efficiency and in turn, its volumes. For PRESCO, we expect the producer to deliver revenue expansion supported by improved volumes.

Consumer Staples: Across our coverage universe, we expect most HPC names to report single-digit volume growth over 2023 as we expect the high inflationary pressures to persist (Cordros estimate: 18.01% y/y), thus, keeping consumer spending in check. Nevertheless, we believe the agro-allied and the brewery sub sectors will lead the next growth phase. Accordingly, we see scope for earnings growth for Agro-allied names — FLOURMILL (BUY, TP: NGN63.12/s), NASCON (BUY, TP: NGN27.84/s), and DANGSUGAR (BUY, TP: NGN26.31/s), given the inelastic demand facing their products and the ability to implement more significant price increases than peers. In contrast, the HPC’s growth will be more muted due to more exposure to foreign currency volatility and cost pressures. For Brewery stocks, NB (BUY, TP: NGN60.71/s) and GUINNESS (BUY, TP: NGN93.25/s), we expect price increases and premiumisation to remain supportive of earnings growth amid cost pressures arising from higher excise duties and the high inflationary environment.

Oil & Gas (Downstream): We expect the price cap on PMS to remain in place, though we acknowledge the possibility of a hike in the product’s price. We expect the NNPC to remain the sole supplier of the market, pending the potential commissioning of the Dangote Refinery in 2023.

As structural issues persist, we highlight that individual product sourcing will remain a big challenge for downstream players. Our top pick remains TOTAL (BUY, TP: NGN435.35/s) as we expect the company to maintain its resilience in 2023, leveraging its ample storage and distribution network to sustain its control of sector volumes.

“An enabling environment must be created to sustain current private sector investment in the sector and attract new private capital to the electricity sector. Urgent reforms are vital with respect to electricity tariff, metering and deepening of energy mix. We need robust incentives [fiscal and monetary] to boost private investment in renewable energy”

Economic reform imperatives for 2023

Director, Centre for the Promotion of Private Enterprise, Muda Yusuf, said the government must embark on urgent reforms to unlock growth and investment in 2023.

“The enactment of the Petroleum Industry Act [PIA] was a major step towards the reform of the oil gas sector. It promises to transform the sector through the creation of a legal and regulatory framework that would inspire much higher levels of investors’ confidence. But we need to see greater commitment to the implementation of the PIA. The deregulation of the petroleum downstream sector is a major economic reform imperative. This is inevitable if we must unlock investment in the sector and put an end to the perennial fuel scarcity and the monopolistic structure of the sector,” he said.

Yusuf also insisted that there is a need to also consolidate the power sector reform.

His words: “An enabling environment must be created to sustain current private sector investment in the sector and attract new private capital to the electricity sector. Urgent reforms are vital with respect to electricity tariff, metering and deepening of energy mix. We need robust incentives [fiscal and monetary] to boost private investment in renewable energy.

“We should reform the budget and appropriation processes to prioritise infrastructure financing and human capital development. This would boost productivity and competitiveness of the economy. Adoption of these reform initiatives would guarantee progression towards fiscal consolidation, reduction in fiscal deficit, diminishing need for borrowing and abating debt service burden,” he added.